Texte intégral

1Out of Barry Eichengreen’s books, this is the one that is most likely to be made into a Hollywood screenplay. It reads like a novel. The first chapter begins with the story of World War II concentration camp survivor Salomon Sorowitsch sitting on a beach holding a suitcase full of dollars of dubious provenance, which he hopes to launder and enlarge, in the casinos of Monte Carlo, as depicted in the movie The Counterfeiters. The second chapter begins with the story of English religious dissidents landing in Massachusetts in 1620, bringing with them insufficient stocks of European monies. This book brilliantly weaves six centuries of stories into a coherent and cogent account of the international monetary system.

2The core of the book is a historical account of the United States’ dollar’s rise to international prominence in the first half of the twentieth century and challenges to its dominance during the second half of the twentieth century. Prominence, in this context, means that the dollar is the principal unit in which individuals and firms invoice and settle trade, denominate commodity prices, and settle international financial transactions. It is also a principal asset that central banks hold as reserve currency, and the exchange rate with the dollar, is a principal price pegged by central banks.

3The title of the book refers to the advantages that accrue to the United States because it possess the dominant global currency, a situation which Charles de Gaulle’s finance minister Valery Giscard d’Estaing referred to as “exorbitant privilege.” This privilege confers considerable benefits for U.S. residents, banks, and firms. Among these include not having to pay currency conversion fees and having a safe currency that is relatively immune to exchange rate risks. The dollar’s status also confers a much more contentious benefit to the issuer. This comes in the form of seigniorage, or the real resources that foreigners must provide to the U.S. in order to use dollars. When $250 billion of dollar banknotes circulate abroad, seigniorage gains to the U.S. government can be substantial. Add to this the fact that foreign central banks hold nearly $5 trillion of U.S. treasury bonds, and it is easy to see that the stakes can get quite large. These factors enable U.S. residents to pay relatively low interest on their foreign liabilities while also receiving high returns on their foreign assets. This in turn permits the United States to finance large current account deficits (approaching 6% of GDP prior to the financial crisis).

4The exorbitant privilege of the dollar has distributional consequences that should not be ignored. Eichengreen offers a vivid account:

With cheap foreign financing keeping U.S. interest rates low and enabling American households to live beyond their means, poor households in the developing world ended up subsidizing rich ones in the United States. The cheap finance that other countries provided the U.S. in order to obtain the dollars needed to back an expanding volume of international transactions underwrote the practices that culminated in the crisis. The United States lit the fire, but foreigners were forced by the perverse structure of the system to provide the fuel. (5)

5Perhaps somewhat less emphasized is that having a dominant international currency also has particularly salient redistributive effects within the United States itself. A strong currency makes exports more expensive and imports cheaper, making it increasingly difficult for domestic producers to maintain their businesses. As U.S. manufacturing continues to decline, more jobs are driven overseas. It is therefore just as important to emphasize that the exorbitant privilege of the dollar benefits a certain group of people and set of industries in the United States.

6The book is framed around an important puzzle: why the U.S. dollar remains the world’s premier international currency despite many predictions of its demise. Chapter 1, which serves as an introduction, frames the question. It begins by presenting the conventional wisdom concerning the current position of the dollar: that the dollar’s continued dominance is in question, and that a weakening of the dollar threatens the economic health and political power of the United States. The principal reason that the dollar retains its position is the overwhelming advantage of incumbency; with this advantage, another currency—such as the euro, pound, or renminbi—would rise to a position of preeminence and dominate the dollar. The United States would be poorer and weaker. This conventional wisdom, Eichengreen writes, is “wrong” (6).

7The remainder of the book sets the record straight. Chapter 2, entitled Debut, discusses the history of the dollar from its colonial origins to the contraction of the 1930s. The chapter makes two key points. First, before World War 1, the dollar played no role in the international monetary system. In the pecking order of currencies, it fell behind the British sterling, German mark, French franc, Swiss franc, Dutch guilder, Italian lira, Belgian franc, and Austrian shilling. The dollar had no role, despite the size and strength of the U.S. economy, for several reasons. The U.S. lacked a central bank. Its currency was a hodge-podge of bond-backed notes issued by commercial banks, legal tender notes from the mid nineteenth century, and gold-backed notes issued by the Treasury. U.S. financial markets were volatile. The U.S. lacked a market for trade credits. U.S. commitment to its exchange rate (set by the gold standard) seemed uncertain, given strident political opposition to gold.

8Second, after 1914, the dollar’s international position improved rapidly. The dollar came to be used increasingly as a unit of account, in invoice and in pricing. Dollar denominated financial assets—particularly trade credits—became increasingly common. Dollars became a growing component of central banks’ holdings of foreign reserves. The dollars’ position improved for two reasons: the founding of the Federal Reserve System and the onset of the First World War. The Fed created a market for trade credits, smoothed seasonal interest rate spikes, reduced financial volatility, and solidified management of the gold standard. World War I complemented these efforts, by disrupting the provision of trade credit in Europe and forcing European nation off the gold standard (which caused the value of their currencies in terms of gold to oscillate wildly). Together, these factors made the dollar an increasingly attractive currency in which to do business. By the 1920s, the dollar had become one of the world’s major international currencies. This episode yields several important lessons. Currency dominance depends upon economic strength, political institutions, and appropriate policies. Dominance can fade rapidly during military conflicts, financial crises, and concerted efforts to promote alternative currencies. And, incumbency advantage can erode quickly.

9Chapter 3, entitled Dominance, describes the history of the international monetary system from 1945 through 1970. The chapter describes the origins and operation of the Bretton Woods System, as well as the impact of the Marshall Plan. It emphasizes the worldwide effects of the dollar’s preeminence and the policies that maintained the dollar’s dominant position. Of interest to readers may be Eichengreen’s discussion of analogies to today’s world, particularly those related to emerging markets like China and India.

10Chapter 4, entitled Rivalry, discusses the history of the international monetary system from the early 1970s through the late 1990s. It focuses on the creation of the Euro, which was the culmination of a process that was centuries long. Precursors to the Euro include a sixteenth century proposal by the King of Bohemia, George of Podebrad, to form a European federation with a single currency to fight the Turks. Napoleon Bonaparte argued for the creation of single currency (under French auspices) to promote the integration of the continent and advance his struggle against England. From the late 19th century until 1914, European currencies were effectively interchangeable under the gold standard. After World War II, the Bretton Woods system restored some predictability to exchange rates. The construction of the Common Market established free flows of goods, labor, and capital. The report of the Werner Committee in 1970 argued that irrevocably locking exchange rates was essential for the preservation of the common market and to protect European integration from destabilizing monetary impulses from the United States. This report foreshadowed a series of additional reports and proposals which led to the creation of the European Monetary System and its operation component, the Exchange Rate Mechanism, which allowed exchange rates to float within narrow bands, which could be realigned periodically, to reflect evolving economic realities.

11Europe’s long flirtation with the concept of a common currency came to fruition between December 1999, when the euro was introduced to world financial markets as an accounting currency, and January 2002, when Euro coins and banknotes entered circulation. Behind the creation of the Euro lay numerous motivations. The instability of the dollars since breakup of the Bretton Woods system in the 1970s encouraged Europeans to form a single currency to insulate themselves from destabilizing monetary impulses. In the 1990s, Germany wanted to gain French assent to German reunification. France desired to assert more control over monetary policies dictated by the Deutsche Bank, whose decisions had dominated European monetary conditions for decades.

12Eichengreen summarizes these motives and their consequences as follows:

The euro is fundamentally a political project. This is its weakness, since it explains how it was that the euro was created before all the economic prerequisites needed for its smooth operation were in place. But it is also its strength, since it explains why the member states now feel compelled to complete them – and why the euro is likely to emerge from its crisis stronger than before (70).

13Chapter 5, entitled Crisis, examines the causes of the financial crisis that began in 2007 and 2008 and continues to afflict the international economy today. These causes can be grouped into four categories. The first is the exorbitant privilege, which explains the massive capital flows to the United States during the decade before the crisis. These flows lowered interest rates in the United States and flattened the yield curve, encouraging individuals and firms to borrow additional funds, generating a bigger economic boom and subsequently sharper bust. The second category consists of de-regulation, globalization, and increased competition among financial firms. These impulses forced firms to stretch their balance sheets and strive to earn higher returns with smaller reserves and less capital, leaving firms vulnerable to counter-party cascades and financial panics. The third category consists of financial innovations. Examples include mortgage backed securities and complex derivatives, such as collateralized debt obligations. These complex products became “a way of disguising risks rather than simply assembling them into more efficient bundles” (99). The pace of innovation left regulators far behind, unable to judge the value or risk on firm balance sheets. The pace also prevented firms from fully testing their models and contracts, leaving them vulnerable to rare shocks and extreme events. The fourth category centers on complacency. Powerful political and economic ideologies insisted that unfettered markets worked best. Derivate markets were efficient mechanisms for redistributing risk. These beliefs led to little or no oversight of expanding financial markets and a belief that continuing innovation lowered risks. Complacency enveloped almost everyone in America. The great moderation of the 1980s and 1990s produced a long period of low output volatility, high employment, and stable prices. These calm conditions generated confidence among economic agents who borrowed more and saved less.

14Chapter 6, entitled Monopoly No More, discusses the consequences of the crisis for the dollars’ international position. The crisis created reasons that the dollars’ monopoly might fail. Some of these developments occurred in the United States. These include the reduced reputation of U.S. financial assets, the increasing volatility of U.S. financial markets, the increasing U.S. national debt (and subsequent fears of internal inflation and currency depreciation), and uncertainty about U.S. political and economic policies. Other developments occurred outside the United States. Some of these interacted with long-run economic trends, including the economic growth of European, Asian, and South American nations, which diminished the importance of U.S. import and export markets, and the changing political landscape, including the fall of the USSR and rise of China, which shifted the bulk of the U.S.’s foreign obligation from European allies dependent on the United States Army for defense against communists to Asian nation’s independent of and increasingly rival to the U.S..

15For the present, however, the dollar remains the dominant international currency. It retains its position for several reasons. Incumbency does have some advantages. The U.S. Treasury market is the most liquid in the world, and that status quo is self reinforcing. Since the U.S. market is so large, investors from around the world concentrate their transactions there. “All the other candidates for the dominant international currency have serious shortcomings” (126). The United Kingdom and Switzerland’s economies lack the size and scope to provide debt markets on the scale required by the international financial system. Japan’s economy has been in a slump for a decade, and in the past, the Japanese government discouraged the international use of the yen because internationalization of the yen threatened to undermine Japan’s ability to encourage export-oriented manufacturing by maintaining a ‘competitive’ exchange rate. “The Euro is a currency without a state” (130): Europe is currently mired in a debt and economic debacle, and the continent appears unable to create economic and political mechanisms needed to manage its financial and economic union.

16Despite these factors in favor of the dollar, Eichengreen’s ultimate thesis is that the dollar’s dominance rests on shaky foundations, and according to history, a likely situation is one where several international currencies come to share the spotlight with the dollar:

A world in which we need to prepare is thus one in which several international currencies coexist… Serious economic and financial mismanagement by the United States is the one thing that could precipitate flight from the dollar. And serious mismanagement, recent events remind us, is not something that can be ruled out. We may yet suffer a dollar crash, but only if we bring it on ourselves.” (8)

17The most likely future scenario, Eichengreen argues, is one with “multiple international currencies” (150). This world “is coming because the world is growing more multipolar, eroding the traditional basis for the dollar’s monopoly” (150). While forecasting is risky, Eichengreen predicts that the leading economic currencies of the next half century will be the dollar, Euro, and renminbi. If convergence in economic productivity and living standards continues, India’s rupee and Brazil’s real may be potential future candidates, due to the size of those nations and depth and liquidity of their financial markets, but their ascent depends in part upon improvements in their governments’ economic and regulatory policies.

18Chapter 7, entitled Dollar Crash, asks “what if the dollar does crash? What if foreigners dump their holdings [of dollars] …?” Why would this scenario occur? What could U.S. policymakers do about it? To citizens of the United States, Eichengreen’s answers are a bit frightening, and encouraged the authors’ to hedge this risk by retaining property near Beijing and a renminbi denominated account in Shanghai.

19The seven chapters of Eichengreen’s book inform the academic enterprise of understanding the international monetary system. This is a colossal contribution in itself, but the book does more, particularly by suggesting directions for future research. In particular, it would be useful to have a theory of international currency that gives a clear analytical framework to study the main tradeoffs at hand. Many researchers have pursued this objective, such as Swoboda (1969), Krugman (1984), Matsuyama, Kiyotaki, and Matsui (1993), and Rey (2001), to name a few.

20Indeed the story in the book suggests that certain models fit the facts better than others. For example, search based models of international currency, pioneered by Matsuyama, Kiyotaki, and Matsui (1993), seem particularly relevant as they explicitly formalize private citizens’ decision to accept or reject certain currencies and can explain what physical properties of a currency make people more or less likely to use it. From the book, we know that an international currency is often safe and must be easily recognizable (i.e. its quality must be easily verifiable). For example, the rise of the dollar prior to World War I was partially due to the increasingly dubious nature of the quality of foreign bonds (32).

21Then to explain why usually a few currencies (and often times only one) dominate the international scene, economists have suggested that transactions costs motivate individuals to coordinate on the monies that are cheapest to use. There are two main approaches here. The first relates exogenous transaction costs to the intrinsic properties of currencies (e.g. Menger (1892), Hayek (1976)). Another view relates transaction costs with size, in which case strategic externalities allow an international currency to become more valued since other people are using it as well (e.g. Matsuyama, Kiyotaki, and Matsui (1993), Rey (2001)). These models therefore capture the fact that international currency status is subject to inertia, persistence, and hysteresis.

22We would also want a theory of international currency that can make a connection with inflation and monetary policy since a country’s inflationary policy has direct implications for seigniorage. This may in turn imply distributional effects of monetary policy that benefit domestic residents while harming foreigners. Finally, such a theory should also take into account interactions between different countries and include the possibility of multiple competing currencies. Competition between multiple currencies such as the euro and the Chinese renminbi is a particularly important issue raised by the book (and in fact, as Eichengreen points out, a likely future state of affairs), one that deserves more attention.

23The reader will experience how the historical experience of the dollar and insights from Eichengreen’s book translates into a useful framework to use to study international currency status and what this means for the future of the international monetary system. The book makes clear the main tradeoffs faced by domestic and foreign consumers, firms, and policymakers in their decision to use dollars, which in turn benefits the academic enterprise of resolving the original puzzle the book poses. So, why is the dollar still number one, despite various predictions of its demise? Eichengreen’s answer is that in the context of history, this is not really a puzzle at all.

Bibliographie

Kindleberger, Charles. 1967. International Currencies and the Politics of International Language. Essays in International Finance, No. 61, Princeton University.

Krugman, Paul. 1984. The International Role of the Dollar: Theory and Prospect. In J.F.O. Bilson and R.C. Marston (eds.), Exchange Rate Theory and Practice, Chicago, IL: The University of Chicago Press.